Breaking News
Ad-Free Version. Upgrade your experience. Save up to 40% More details

U.S. small caps waver as reflation trade wobbles

Stock MarketsJul 16, 2021 06:11PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters. FILE PHOTO: A Wall Street sign is pictured outside the New York Stock Exchange in New York, October 28, 2013. REUTERS/Carlo Allegri

By David Randall

NEW YORK (Reuters) - Expectations that the U.S. economic rebound will slow in the second half are weighing on small cap stocks, forcing fund managers to look for companies that could continue to profit in a lower growth environment.

The Russell 2000 index, which tracks smaller companies, has underperformed the S&P 500 in each of the last four months. Investors pulled nearly $108 million out the iShares Russell 2000 index exchange traded fund during the week that ended July 14, the third straight week of outflows that combined to total nearly $965 million and represent the ETF’s longest losing streak since April.

Small caps stocks have been among the beneficiaries of the so-called reflation trade, which also saw investors bet on shares of banks, energy firms and other economically sensitive companies and lighten up positions in U.S. Treasuries on expectations of a powerful economic rebound. The Russell 2000 is up 11.6% this year, compared to an 16.3% rise for the S&P 500.

Some now believe that bounce has run its course and the economy will slow in coming months, sparking a rotation back into the technology and high-growth stocks that have led markets higher over the last decade.

Yields on the benchmark 10-year Treasury, which move inversely to prices, edged higher Friday but remained near their lowest levels since February. In testimony before Congress earlier this week, Federal Reserve Chairman Jerome Powell said rising inflation is likely to be transitory and that the U.S. central bank would continue to support the economy, adding to pressure on yields.

"We have perhaps passed peak inflation fears, and we've also passed peak growth optimism," said Brian Jacobsen, senior investment strategist at Wells Fargo (NYSE:WFC) Asset Management.

His firm has been paring its overweight on small caps and is now neutral on the asset class due to expectations that the economic boom from the coronavirus recovery will be short-lived.

Overall, fund managers have unwound their bullish bets on small caps relative to large caps back to levels last seen in October 2020, before the announcement of effective coronavirus vaccines helped fuel an outsized rally in cyclical and small-cap stocks, according to a global survey of fund managers by BofA Research.

Low bond yields will likely continue to weigh on small-caps as investors opt for sources of income such as dividend stocks rather than look for capital gains, said Lamar Villere, a portfolio manager at Villere & Co.

“People are trying to chase any yield that they can and that comes at the expense of small caps. You’ve got this huge demand on the client side for blue chip dividend paying stocks right now because it’s the only place you can get any sort of yield,” he said.

His firm has not added any new positions in small-caps over the last six months, he said, and has instead added companies such as media giant Viacom Inc to its portfolios.

Investors will get additional clues as to how broadly the U.S. economy is expanding in the week ahead through data showing new housing starts on Tuesday and an index of leading economic indicators on Thursday.

Netflix (NASDAQ:NFLX) and Twitter, meanwhile, are also expected to release their latest quarterly earnings results in the week ahead, giving investors a deeper read into how the reopening of the economy has affected revenue growth.

Signs that high inflation will persist longer than the Fed expects could bolster small caps, said Jim Paulsen, Chief investment strategist at the Leuthold Group.

Overall, the Russell 2000 should post a 50% growth in earnings over the 2021 fiscal year, compared with a 44% earnings growth in the large-cap S&P 500, according to Jefferies (NYSE:JEF).

That outsized growth rate and high valuations in the S&P 500 could make small caps a contrarian play over the remainder of the year, said Saira Malik, chief investment officer of global equities at Nuveen, who said that she has been adding to financials in expectation that the 10-year Treasury yield will end the year near 2%.

"We definitely think it will be tougher in the second half, but there will be some permanence to inflation and that would be positive to small caps," she said.

U.S. small caps waver as reflation trade wobbles

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (2)
Todd Gray
Todd Gray Jul 17, 2021 4:35PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
post the 1929 crash, and on an annual basis, inflation spiked up and down for about a decade. at the end of the decade, prices had gone up substantially. transitory can go both ways. high prices are not permanent. but, neither are low prices.
Devendra Ahirwar
Devendra Ahirwar Jul 17, 2021 4:35PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
whare is news
James Andrews
James Andrews Jul 16, 2021 8:25PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Inflation is just getting started.. Just wait.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email